The U.S. Securities and Exchange Commission has taken action against Harvest Volatility Management and Merrill Lynch for violating clients’ investment limits over a two-year period. Both companies have agreed to pay a total of $9.3 million in penalties to settle the charges.

Harvest was the primary investment advisor for the Collateral Yield Enhancement Strategy, which traded options in a volatility index to generate incremental returns. However, beginning in 2016, Harvest allowed numerous accounts to exceed the exposure levels set by investors when they signed up for the strategy. Some accounts exceeded the limit by 50% or more, according to the SEC.

Merrill Lynch, owned by Bank of America, connected its clients to Harvest despite knowing that accounts were exceeding the designated exposure levels. Merrill also received a portion of Harvest’s trading commissions and fees, further incentivizing the excessive risk-taking behavior.

Both Merrill and Harvest received higher management fees while investors faced greater financial risks due to the exposure limits being breached. The SEC found that both companies failed to implement policies and procedures to alert investors of the exceeding limits, putting clients at risk.

Mark Cave, associate director of the SEC’s enforcement division, commented on the case, saying, “Today’s action holds Merrill and Harvest accountable for dropping the ball in executing these basic duties to their clients, even as their clients’ financial exposure grew well beyond predetermined limits.”

In response to the charges, a representative from Bank of America stated that the company had terminated all new enrollments with Harvest in 2019 and advised existing clients to unwind their positions.

Overall, the SEC’s enforcement actions against Harvest Volatility Management and Merrill Lynch highlight the importance of investment advisors adhering to client instructions and implementing proper policies to protect investors from excessive financial risks.